Internet sales tax will meet resistance

Thune, Johnson say it's about fairness; hard sell expected in House

May 8, 2013

Written by

Staff and wire reports

Fast facts

• Last year, Internet sales in the U.S. totaled $226 billion, up nearly 16 percent from the previous year, according to government estimates. • States lost a total of $23 billion last year because they couldn’t collect taxes on out-of-state sales, according to a study done for the National Conference of State Legislatures, which has lobbied for the bill currently in Congress. About half of that was lost from Internet sales; half from purchases made through catalogs, mail orders and telephone orders, the study said.

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WASHINGTON — Traditional retailers and cash-strapped states face a tough sell in the House as they lobby Congress to limit tax-free shopping on the Internet.

The Senate voted 69-27 on Monday to pass a bill that empowers states to collect sales taxes from Internet purchases. Under the bill, states could require out-of-state retailers to collect sales taxes when they sell products over the Internet, in catalogs, and through radio and TV ads. The sales taxes would be sent to the states where a shopper lives.

Current law says states can require retailers to collect sales taxes only if the merchant has a physical presence in the state.

That means big retailers with stores all across the country such as Wal-Mart, Best Buy and Target collect sales taxes when they sell goods over the Internet. But online retailers such as eBay and Amazon don’t have to collect sales taxes, except in states where they have offices or distribution centers.

South Dakota Rep. Kristi Noem wouldn’t say how she would vote if the issue does reach the House floor. Nevertheless, she said, the issue is about fairness. She added that she thinks small businesses in South Dakota can compete with large, online-only retailers if there is “a level playing field.”

“This legislation provides that level playing field while also providing flexibility for small online retailers, which his important, said Noem, a Republican.

Mike Enzi, a Republican from Wyoming and the bill’s main sponsor in the Senate, also sees the legislation as a fairness issue.

“It’s about leveling the playing field between the brick and mortar and online companies and it’s about collecting a tax that’s already due. It’s not about raising taxes.”

Painted as tax hike by conservatives

The bill got bipartisan support in the Senate but faces opposition in the House, where some lawmakers regard it as a tax increase. Grover Norquist, the anti-tax advocate, and the conservative Heritage Foundation oppose the bill, and many Republicans have been wary of crossing them.

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Supporters say the bill is not a tax increase. In many states, shoppers are required to pay unpaid sales tax when they file their state tax returns. However, states complain that few taxpayers comply.

“Obviously, there’s a lot of consumers out there that have been accustomed to not having to pay any taxes, believing that they don’t have to pay any taxes,” said Republican Rep. Steve Womack, the bill’s main sponsor in the House. “I totally understand that, and I think a lot of our members understand that. There’s a lot of political difficulty getting through the fog of it looking like a tax increase.”

Support from Johnson and Thune

South Dakota Sens. Tim Johnson, a Democrat, and John Thune, a Republican, each voted for the bill Monday. They both talked about the fairness issue and “leveling the playing field” as reasons for supporting the bill.

“The government should not be in the business of picking winners and losers,” Thune said. “In a state like South Dakota, many small retailers are trying to compete for local business to stay afloat, but are currently at a competitive disadvantage due to the inability of our state to collect sales taxes that are already due under current law.

“I expect that if the House decides to take up this legislation it will be subject to additional changes,” Thune added. “I appreciate the importance of this bill to our state and I hope and expect that for every dollar of sales tax revenue collected on account of this bill, that the South Dakota Legislature will find an equal amount of tax relief elsewhere.”

Johnson urged House members to pass the bill.

“It will provide vital resources to state and local governments, which could prevent the need to raise taxes or cut funding for critically important programs and services,” Johnson said.

Need to simplify tax regulations

Republican House Speaker John Boehner has not commented publicly about the bill, giving supporters hope that he could be won over.

“While it attempts to make tax collection simpler, it still has a long way to go,” said Republican Rep. Bob Goodlatte, chairman of the House Judiciary Committee. Without more uniformity in the bill, he said, “businesses would still be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions.”

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Goodlatte said he’s “open to considering legislation concerning this topic,” but he wants certain issues addressed.

Internet giant eBay led the fight against the bill in the Senate, along with lawmakers from states with no sales tax and several prominent anti-tax groups.

The bill’s opponents say it would put an expensive obligation on small businesses because they are not as equipped as national merchandisers to collect and remit sales taxes. Some states have sales taxes as high as 7 percent, plus city and county taxes that can push the combined rate even higher.

Businesses with less than $1 million in online sales would be exempt. EBay wants to exempt businesses with up to $10 million in sales or fewer than 50 employees.

“The contentious debate in the Senate shows that a lot more work needs to be done to get the Internet sales tax issue right, including ensuring that small businesses using the Internet are protected from new burdens that harm their ability to compete and grow,” said Brian Bieron, eBay's senior director of global public policy.

States complain they're losing out

Many governors — Republicans and Democrats — have been lobbying the federal government for years for the authority to collect sales taxes from online sales.

Andy Gerlach, secretary of the South Dakota Department of Revenue, said the legislation winding through Congress is the best option so far. He estimated that South Dakota is losing $48 million to $58 million annually because there is no Internet tax. Gerlach said the lost revenue is “a pretty significant loss when you look at our overall state budget. The trend is out there. People are using the Internet to purchase. I don’t see that going any other direction but continuing to grow.

“I really hope it passes and I know that South Dakota retailers, Gov. (Dennis) Daugaard and businesses across South Dakota and the Department of Revenue are watching this closely,” Gerlach added. “I really hope Congress does the right thing.”

The issue is getting bigger for states as more people make purchases online.

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Last year, Internet sales in the U.S. totaled $226 billion, up nearly 16 percent from the previous year, according to government estimates.

Businesses that sell online do have an advantage over brick-and-mortar stores and it’s a competition his business wages often, said Torin Lodmell, store manager at Karl’s TV and Appliance in Sioux Falls. He hopes the legislation passes and eliminates what he sees as an unfair advantage for online companies.

“Especially in the consumer electronics business that I’m in — it’s very volatile as far as pricing on things, and sometimes (no sales tax) can be a make or break for me as far as making a sale.”

He added: “It’s overdue, I think it really is.”

Supporters say the bill makes it relatively easy for Internet retailers to comply. States must provide free computer software to help retailers calculate sales taxes, based on where shoppers live. States must also establish a single entity to receive Internet sales tax revenue, so retailers don't have to send it to individual counties or cities.

Opponents worry the bill would give states too much power to reach across state lines to enforce their tax laws. States could audit out-of-state businesses, impose liens on their property and, ultimately, sue them in state court.